Making Hay Monday – July 28th, 2025
Making Hay Monday
An Electrifying Investment Story
“The nation’s electrical power grid will be unable to meet expected demand for AI data centers, manufacturing and industrialization while keeping the cost of living low for all Americans.” – The Department of Energy, July 7th, 2025; in the same report it warned the risk of power outages could rise 100 times by 2030 (as quoted by Gavekal Research)
An Electrifying Investment Story
Shutterstock
Last September, we published our Gas Pains edition of Making Hay Monday,outlining a bullish case for natural gas and, particularly, the producers of the blue fuel. As we’ve mentioned a few times, since then gas has been, well, on fire.
Five-year price of Natural Gas Strip (average of next 12 months futures prices)
Bloomberg
As you can see, at one point it had risen nearly 70% from where it was trading at the time of our tout. The strip price remains about 20% higher than September 2024. But, as we’ve also noted in the interim, it’s been a varied story for the natural gas producers. Some have performed very well, particularly Expand Energy (EXE), the combination of the old Chesapeake Energy and Southwest Energy (though it has corrected hard of late). Others have tremendously lagged the price increase in gas which, despite a correction, remains about 70% higher than last September.
We’ll soon highlight one that strikes me as both technically and fundamentally attractive in the second section of this MHM. But befitting our usual macro-then-micro approach, we’ll first articulate why we believe natural gas will continue to jaggedly work its way higher.
First of all, natural gas is trading at roughly $11.75 per million British Thermal Units (MMBtu), very loosely equivalent to a gallon of gas) in Europe. Presently, the benchmark U.S. Henry Hub price is $3.80. That seems like a crazy wide gap until you realize the cost of converting U.S. natural gas into liquefied natural gas (LNG) and then shipping it to the Continent, in extremely specialized and expensive ships, is in the $7.00 to $8.00 range. (Unlike oil, gas is not easy or cheap to ship; the first step is liquefaction which costs around $3.00 per MMBtu. There are also no gas pipelines that cross the Atlantic to Europe, much less across the Pacific to Asia.)
U.S. LNG shipments to Germany, Europe’s industrial giant, were already up about 500% from prior to Russia’s attack on Ukraine. As part of the just-announced trade deal, the EU has agreed to increase U.S. energy imports by $750 billion. (The below image should also be credited to Jefferies’ outstanding analyst Chris Wood.)
Wood, Jefferies
Accordingly, at this point the net difference is not all that substantial. However, unlike Russian gas, its delivery is a much surer bet as well as a far less morally repugnant one for European buyers. Irrespective of a deep drop off in its imports of Russian gas, it still buys about 6 billion cubic feet a day from Putin’s regime.
Despite the skinny all-in cost differential, American exports of nat gas are projected to increase by around 50% by 2030, per Bloomberg and BNEF. Actually, the natural resource experts at Goehring & Rozencwajg (G&R) feel it will increase to that extent by the end of next year. If so, that would represent about 18% of total U.S. gas production. The highly credible Energy Information Administration, EIA (in contrast to the extremely un-credible IEA, or International Energy Agency), sees U.S. LNG shipments doubling by 2030. If so, that’s a whopping 24% of total U.S. natural gas production, up from the current 12%, an incredible development as we will soon see. Adding credence to these projections, India, with its 1.4 billion population, is expected to double its LNG imports by 2030 with much of that coming from the U.S.
To put it in oil terms, using the EIA’s projection of a doubling of U.S. LNG shipments by 2030, it would be approximately equivalent to an extra 2.5 million barrels per day (bpd) of increased demand for American crude, an amount that would surely spike its price, possibly pushing it close to $100/barrel. In other words, this is a very big looming call on U.S. natural gas output. (America’s total crude production is about 20 million bpd, including natural gas liquids which are seen as oil equivalents for many byproducts like ethane and propane. A hypothetical 12% increase in demand for American crude would, therefore, come to around 2.5 million bpd.)
Additionally, this is colliding with exploding domestic demand increases. Per the Lawrence Berkeley National Laboratory, data center (DC) demand will rise from 4.4% of all U.S. electricity consumption in 2023 to a range of 6.7% to 12% by 2028. Using the mid-point of 9.35%, that’s a staggering increase over a five-year period. Much, if not most, of that will need to be fueled, literally, by natural gas. This is particularly the case with the drastically waning federal government support for renewable energy sources. Even excluding that significant change, intermittent wind and solar are not suited for the always-on needs of AI-related DCs.
Underscoring this reality, the new Stargate DC joint venture between Open AI and Oracle, recently announced it requires 4.5 gigawatts (GW) of electricity demand. Meta has plans for a 5 GW power plant in Louisiana (thanks to the Grant’s Interest Rate Observer for these data points). To put this into context, that’s roughly equivalent to the output from over nine new large-scale nuclear facilities. Realize that, in the U.S. at least, these cost about $14 billion each. Fortunately, combined-cycle gas plants, the latest technology, are much cheaper… and far easier and quicker to build. (One caveat is that there presently is an acute shortage of the large nat gas turbines.)
They also have the advantage of being able to be located close to where they are needed. As a result, they don’t have to rely on the creaky U.S. power grid and/or long distance transmission lines to get from power production to the end user.
That’s why it’s logical to assume that most AI DC demand will need to be satisfied by natural gas, not nuclear. However, over time Small Modular Reactors (SMRs) and microreactors, such as those that run on molten salt, should become viable competitors to “nattie”, though their arrival at any kind of commercial scale is almost certainly several years out.
Indicating the urgent need for more natural gas-powered plants, electricity prices are soaring, particularly in the so-called “data center alley” in the greater Washington, D.C. area. (Actually, the far greater region, as it includes 13 states, with particularly heavy usage in Northern Virginia.) These power prices have vaulted by 22% over last year. Nationally, they are running at 6.7% year-over-year increases. That’s about one-third less than in D.C. but way above the supposed ~2.5% official CPI rate.
Energy industry giants Exxon and Chevron are also getting in on the DC (data center, not District of Columbia) action. Between them, they are planning to add five and a half GWs of these “power foundries”, as Chevron refers to its DC projects. Ergo, that’s equivalent to around five and a half new large-scale atomic energy plants (each of those typically has an output of around one GW).
Fortunately, the U.S. now produces 103 billion cubic feet of gas per day. It currently exports around 12 BCF; as a result, it is the world’s largest gas exporter. This is truly astounding considering that as recently as 2007 it was the world’s biggest importer. Credit for this goes to America’s “shale miracle” and the energy entrepreneurs behind its success. (Of course, oil has been pretty much the same miraculous story.) In my view, this is one of America’s greatest industrial accomplishments in its history, and yet the mainstream media has either ignored or demonized this achievement.
The bull story for natural gas is, of course, not all pluses and no minuses. One negative is surging output from the Permian Basin. America’s most prolific shale basin is famous for its crude production, but it has become increasingly “gassy”, despite that nattie is basically an accidental output. It is called “associated gas” since oil is the target resource; regardless, it has exploded from 5 BCF per day in 2018 to 20 BCF per day now. This means the Permian represents about 20% of all U.S. natural gas production.
Moreover, pipelines have been built at a frenetic pace so this gas can make it to the LNG-exporting facilities along the Gulf Coast (and now even in West Texas where a pipeline will ship the gas through Northwestern Mexico to the Gulf of California, creating a much shorter route to Asia). Consequently, the amount of gas that is wasted, or flared, is coming down rapidly. That’s a good thing because, as we’ve seen, America and the world are in dire need of more gas.
Another negative is that Canada is brimming with gas and it trades much cheaper than even the U.S. Prior Canadian governments, especially Justin Trudeau’s, have been very hostile to building pipelines, but its new leader, Mark Carney, has adopted a much more construction-friendly set of policies. At current exchange rates, Canadian gas is only around $2.00 per MMBtu.
Some of Canada’s bountiful supply will end up in the U.S., but it is also ramping up to compete with American exports to Asia from its new Kitimat facility. That just opened at the end of June, but the eventual capacity is projected at 3.7 BCF per day. This represents lost business for U.S. gas exporters but, fortunately, there is plenty of demand for cheap and dependable North American natural gas.
Another drawback versus last fall is that the futures market is somewhat optimistic about future gas prices. This is in stark contrast to the extremely bearish positioning in the third quarter of 2024. We pointed that out in Gas Pains and it was a crucial plank of our highly optimistic assessment at the time.
(The key is the red line below; when it is high, it reflects bullish positioning, ironically, a bearish condition.)
Kemp
Finally, on the less bullish side, gas inventories in the U.S. and Europe look adequate. However, they have been coming down from excess levels, rapidly in the case of the USA.
To close this section, when I look at the supply/demand dynamics, it seems very clear to me that the latter is highly likely to be much stronger than the former. In fact, it appears that the U.S. natural gas shale basins are peaking as has already happened to those that primarily produce oil. This is occurring even in the mighty Permian. If its production decline becomes clearer and steeper, that implies less associated gas will be available.
But what gets my contrarian juices truly running hot is how inexpensively some of the natural gas producers’ stocks are trading. And that’s the segue into this week’s highlighted name.
One of the benefits I personally derive out of writing MHMs, is that I often become much more familiar with companies in which I’ve previously had only a passing interest. In other words, they’ve been on my dashboard and, in some cases, I’ve written them up briefly, but I haven’t done the proverbial deep dive. Today’s featured security is a pleasant example of this…
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